Module 3

3.3a - EXPLAINING: Internationalization of Businesses and International

Trading
Learning Objectives:
• At the end of this wrap up lecture you should be able to:
1. Discuss the nature of International Business and some of its
components: Risks and Participants of International Businesses.
2. Define and discuss the nature of International Trade.
3. Explain the impact of International Business and Trade to society
 International Business – A Firm Level Activity

Performance of trade and investment

activities by firms across national
borders.

International Business: Strategy, Management,

and the New Realities
 The Internationalization of Business

• Companies conduct value-adding activities on a global

scale, primarily to organize, source, manufacture, and
market products and services
• A “level playing field” has made international activities
appealing to all types of firms- large and small;
manufacturing and service sectors (e.g. banking,
transportation, engineering and design, advertising, and
retailing).

International Business: Strategy, Management,

and the New Realities
 The Nature of International Business
• All value-adding activities including sourcing,
manufacturing, and marketing, can be performed in
international locations
• The subject of cross-border trade can be products,
services, capital, technology, know-how, and labor
• Firms internationalize via exporting, foreign direct
investment, licensing, franchising, and collaborative
ventures

International Business: Strategy, Management,

and the New Realities
 International trade

• Trading between 2 or more countries

• the essence of Int’l trade is specialization
• a country specializing in production of products for
which it has greater advantage over other countries
• Specialization results to greater volume of output for
the world as a whole than would be possible if each
country tried to be self sufficient.
Meaning of Int’l trade

•Foreign trade
•Involves exchange of goods between and
among individuals, private sector and
governments across countries.
•Import and Export Trading
 Categories of foreign trade
• Bilateral
• Multi Lateral
• Importing and Exporting
• Visible Trade This consists of imports and exports of
tangible goods e.g. vehicles’, coffee, plastics, fruits etc
• Invisible Trade This refers to the purchase and sale of
services or it is the exchange of services between
countries e.g. telecommunications, Insurance, banking
etc.
 International investment

Transfer of assets to another country or the

acquisition of assets in that country.

• International Portfolio investment (typically short-term): Passive

ownership of foreign securities such as stocks and bonds, to generate
financial returns.

• Foreign direct investment (FDI) (typically long-term): An

internationalization strategy in which the firm establishes a physical
presence abroad through acquisition of productive assets such as capital,
technology, labor, land, plant, and equipment.

International Business: Strategy, Management,

and the New Realities
 The Nature of FDI
• Foreign Direct Investment (FDI) - (asset ownership and long
time frame)
• The ultimate commitment-level of
internationalization
• We focus primarily on FDI, as opposed to
International Portfolio investment.
• Large, resourceful companies with substantial international
operations leverage FDI to:
• Manufacture/assemble products in low-cost
countries, e.g., China, Mexico, E. Europe

International Business: Strategy, Management,

and the New Realities
 Dramatic Growth of FDI Since the 1980s

• Developed economies = Australia, Canada, Japan, the United

States, and most countries in Western Europe.
• Developing economies = Parts of Africa, Asia, Latin America,
and the Middle East.
• Of particular significance is the growth of FDI into developing
economies despite widespread poverty and less investment
capital than advanced economies.
• The improved lives of billions are directly linked to world trade
and investment.

International Business: Strategy, Management,

and the New Realities
 International Financial Services Sector

• Banking and financial services are the most active international

services.
• Explosive growth of global capital markets is due to:
• Deregulation of world capital markets
• Falling investment barriers
• Banks/financial institutions are internationalizing in pursuit of
high returns to many previously untargeted countries
• Money is flowing internationally into portfolio investments and
pension funds
• Leading players include Citibank, Deutsche Bank, BNP Paribas, and
HSBC
International Business: Strategy, Management,
and the New Realities
Service Industry Sectors That Are Rapidly Internationalizing
The Four Risks of International Business
 The Four Types of Risks in IB
• Cross-cultural risk: a situation or event where a cultural
miscommunication puts some human value at stake
• Country risk: potentially adverse effects on company
operations and profitability holes by developments in the
political, legal, and economic environment in a foreign
country
• Currency risk: risk of adverse unexpected fluctuations in
exchange rates
• Commercial risk: firms potential loss or failure from
poorly developed or executed business strategies, tactics,
International Business: Strategy, Management,
or procedures and the New Realities
 Risks: Always Present but Manageable

• Managers need to understand their implications,

anticipate them, and take proactive action to reduce
adverse effects.
• Some risks are extremely challenging, e.g., the East
Asian economic crisis of 1998 generated substantial
commercial, currency, and country risks.
• CoVid 19 Global Health pandemic
• Political unrest: Myanmar

International Business: Strategy, Management,

and the New Realities
 Participants in International Business

• Multinational enterprise (MNE): A large company with

substantial resources that performs various business
activities through a network of subsidiaries and affiliates
located in multiple countries.
• In addition to a home office, an MNE owns a worldwide
network of subsidiaries.
• Examples- Caterpillar, Kodak, Nokia, Samsung, Unilever,
Citibank, Vodafone, DHL
• Examples of Fortune’s Global 500- Exxon Mobil, Royal
Dutch Shell, BP, General Motors, DaimlerChrysler, Toyota,
Ford, and Wal-Mart.

International Business: Strategy, Management,

and the New Realities
 Small and Medium-Sized Enterprise
A company defined (in the U.S.) as having 500 or
fewer employees
• Comprise 90 - 95 % of all firms in most countries.
• Increasingly more SMEs participate in international
business
• Account for 1/3 of exports from Asia; 1/4 of the
exports from the affluent countries in Europe and
North America
• Contribute more than 50 percent of total national
exports in Italy, South Korea, and China.

International Business: Strategy, Management,

and the New Realities
 The Born Global Firm

Born global firm: a young entrepreneurial company

that initiates international business activity very early in
its evolution, moving rapidly into foreign markets.
‘Born Globals’ and SMEs:
• Are often more innovative, adaptable, and have quicker response
times;
• Are better able to serve niche markets;
• Leverage the Internet to do international business;
• Tend to minimize fixed costs and outsource, due to limited resources;
• Tend to flourish on private knowledge that they cultivate via their
knowledge networks.
International Business: Strategy, Management,
and the New Realities
 Why do Firms Internationalize?

1. Seek opportunities for growth through market

diversification
2. Earn higher margins and profits
3. Gain new ideas about products, services, and
business methods
4. Better serve customers that have relocated
abroad
5. Be closer to supply sources, benefit from global
sourcing advantages, or gain flexibility in the
sourcing of products
International Business: Strategy, Management,
and the New Realities
 Why do Firms Internationalize? (cont’d)

6. Gain access to lower-cost or better-value

factors of production
7. Develop economies of scale in sourcing,
production, marketing, and R&D
8. Confront international competitors more
effectively or thwart the growth of
competition in the home market
9. Invest in a potentially rewarding
relationships with foreign partners
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 Contributor to National Economic Well-Being

• International trade is a critical engine for job creation. It is estimated

that every $1 billion increase in exports creates more than 20,000 new
jobs.
• One of every seven dollars of U.S. sales is made abroad.
• International business is both a cause and a result of increasing
national prosperity.
• Prosperity is accompanied by literacy rate gains, nutrition and health
care improvements, with some tendencies towards freedom and
democracy.

International Business: Strategy, Management,

and the New Realities
 A Competitive Advantage for the Firm

• Increase sales
• Maximize returns: Foreign markets often generate returns far
superior to those in domestic markets.

• Global scale economies: International players can maximize

their efficiencies by securing cost-effective factor inputs from
around the world.

• Resource acquisition: Access to otherwise unavailable critical

resources

International Business: Strategy, Management,

and the New Realities
 An Activity with Societal Implications
• As firms increase their international activities, so does
responsibility to society to be a good corporate citizen.
• Large corporations like Wal-Mart, Unilever, and Sony
have annual revenues larger than the GDPs of many of
the nations they operate.
• The internationalization of thousands of firms
negatively impacts the natural environment, e.g.
pollution (Royal Dutch Shell’s refining operations in
Nigeria).
International Business: Strategy, Management,
and the New Realities
 An Activity with Societal Implications

• Large banks and international investment brokers have

disrupted the economies of nations with aggressive currency
trading or by manipulating stock markets.
• Some MNEs ignore human rights and basic labor standards
by establishing factories in countries that pay low wages with
substandard working conditions, e.g. Nike in Asia.
• Building factories abroad often leads to job losses at home.
Reference:
• Cavusgil, Knight and Riesenberger. International Business: Strategy,
Management, and the New Realities